Five Charts That Explain OPEC’s Predicament

Next month, OPEC delegates will gather in Vienna to decide on a course of action that will have profound implications for the global oil market. One year ago, the group of oil-producing countries chose not to cut production in the face of rising non-OPEC supply. The resulting price collapse—precipitated also by lower-than-expected global oil demand growth—enabled the group of oil-producing nations to pursue a strategy of defending market share, despite the high breakeven prices needed for many member countries.

Most market watchers believe OPEC’s meeting on December 4 will not bring about any major strategic shifts. As a result, OPEC producers, just like the U.S. oil industry, will likely continue to experience strain due to lower prices. In fact, the low-oil price environment may endure well into the future. For instance, the International Energy Agency’s most recent long-term report predicts oil prices to gradually rise to just $80 per barrel by 2020, a price far below the $100 per barrel or greater seen from 2011-14. The IEA’s outlook may be conservative, but fundamentals are expected to remain loose for some time given non-OPEC supply’s resilience and current high inventory levels.

Ahead of next month’s meeting, Securing America’s Future Energy (SAFE) released its quarterly update to the Energy Security Fact Pack, a data-driven overview of the latest trends in energy security, including domestic and global oil production and consumption, oil market dynamics and prices, and up-to-date information on fuel efficiency and alternative fuel vehicles.

The following five charts from the Energy Security Fact Pack encapsulate the current challenges confronting OPEC.

1) Global Supply Continues to Outpace Demand

Growth in non-OPEC liquids supply has exceeded global oil demand increases for ten straight quarters, placing downward pressure on the amount of crude the market needs from OPEC. A number of forecasters expect this trend to shift in 2016 as high-cost producers in the U.S. and elsewhere slow output.

2) OPEC Supply Remains Far Above Call

Last November, OPEC producers decided against cutting production despite an oversupplied global oil market. OPEC has since increased supply by more than 1.3 million barrels per day (mbd) year-on-year as part of a Saudi-led strategy to defend market share.

3) Easing of Iran Sanctions Will Further Complicate Outlook

Sanctions against Iran led to more than a 50% decrease in Iran’s oil exports versus 2011 levels. However, sanctions are expected to be lifted over the next several months. Analysts believe a rise in Iranian exports could bring at least 0.5 mbd back to the global oil market in 2016 and further prolong the global oil supply glut.

4) Exporters Feel Low Oil Price Pinch

Low oil prices are forcing many oil exporting countries to rethink revenue and spending policies as they seek fiscal stability. Some countries have already begun to draw down foreign assets, and are likely to continue doing so in 2016.

5) Exporters Using Foreign Assets

Saudi Arabia has used an estimated $85 billion of its foreign reserve assets (approximately 11%) since the end of 2013, the most of any OPEC country. Meanwhile, Venezuela has depleted 80% of its foreign reserves.

There is no doubt that the current low-oil price environment, spurred at least in part by OPEC’s shift in strategy, is presenting serious fiscal challenges to many of its members. Countries hit hardest by the group’s output policy, such as Algeria and Venezuela, have been vocal in advocating for the group to support prices through production cuts. However, at least through next month’s meeting, OPEC, led by Saudi Arabia, is unlikely to reverse course.

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The Fuse is an energy news and analysis site supported by Securing America’s Future Energy. The views expressed here are those of individual contributors and do not necessarily represent the views of the organization.

Issues in Focus

Safety Standards for Crude-By-Rail Shipments

A series of accidents in North America in recent years have raised concerns regarding rail shipments of crude oil. Fatal accidents in Lynchburg, Virginia, Lac-Megantic, Quebec, Fayette County, West Virginia, and (most recently) Culbertson, Montana have prompted public outcry and regulatory scrutiny.

2014 saw an all-time record of 144 oil train incidents in the U.S.—up from just one in 2009—causing a total of more than $7 million in damage.

The spate of crude-by-rail accidents has emerged from the confluence of three factors. First is the massive increase in oil movements by rail, which has increased more than three-fold since 2010. Second is the inadequate safety features of DOT-111 cars, particularly those constructed prior to 2011, which account for roughly 70 percent of tank cars on U.S. railroads. Third is the high volatility of oil produced from the Bakken and other shale formations, which makes this crude more prone towards combustion.

Of these three, rail car safety standards is the factor over which regulators can exert the most control. After months of regulatory review, on May 1, 2015, the White House and the Department of Transportation unveiled the new safety standards. The announcement also coincided with new tank car standards in Canada—a critical move, since many crude by rail shipments cross the U.S.-Canadian border. In the words DOT, the new rule:

Since the rule was announced, Republicans in Congress sought to roll back the provision calling for an advanced breaking system, following concerns from the rail industry that such an upgrade would be unnecessary and could cost billions of dollars. The advanced braking systems are required to be in place by 2021.

Democrats in Congress have argued that the new rules are insufficient to mitigate the danger. Senator Maria Cantwell (D-WA) and Senator Tammy Baldwin (D-WI) both issued statements arguing that the rules were insufficient and the timelines for safety improvements were too long.

The current industry standard car, the CPC-1232, came into usage in October 2011. These cars have half inch thick shells (marginally thicker than the DOT-111 7/16 inch shells) and advanced valves that are more resilient in the event of an accident. However, these newer cars were involved in the derailments and explosions in Virginia and West Virginia within the past year, raising questions about the validity of replacing only the DOT-111s manufactured before 2011.

Before the rule was finalized, early reports indicated that the rule submitted to the White House by the Department of Transportation has proposed a two-stage phase-out of the current fleet of railcars, focusing first on the pre-2011 cars, then the current standard CPC-1232 cars. In the final rule, DOT mandated a more aggressive timeline for retrofitting the CPC-1232 cars, imposing a deadline of April 1, 2020 for non-jacketed cars.

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DataSpotlight

The recent oil production boom in the United States, while astounding, has created a misleading narrative that the United States is no longer dependent on oil imports. Reports of surging domestic production, calls for relaxation of the crude oil export ban, labels of “Saudi America,” and the recent collapse in oil prices have created a perception that the United States has more oil than it knows what to do with.

This view is misguided. While some forecasts project that the United States could become a self-sufficient oil producer within the next decade, this remains a distant prospect. According to the April 2015 Short Term Energy Outlook, total U.S. crude oil production averaged an estimated 9.3 million barrels per day in March, while total oil demand in the country is over 19 million barrels per day.

This graphic helps illustrate the regional variations in crude oil supply and demand. North America, Europe, and Asia all run significant production deficits, with the Middle East, Africa, Latin America, and Former Soviet Union are global engines of crude oil supply.